For example, suppose the price of chicken goes up by 10%, and as a result the quantity demanded of pork increases by 2%, with no change in the price of pork or anything else that would influence the demand for pork. Then the cross-elasticity of demand for pork, with respect to the price of chicken, is 2%/10% = 0.2.
If the cross elasticity is positive, it means that an increase in the price of one good will increase the demand for the other good. When we observe a positive cross-elasticity, we say that the two goods are substitutes, as with chicken and pork. Conversely, butter and margarine are substitutes, so we would expect their cross-elasticities to be positive.
If the cross-elasticity of demand is negative, that means that an increase in the price of one good cuts the demand for the other. For example, if the price of bicycles went up, we would expect to see a decline in the demand for bike helmets. In this sort of case, we say the goods are complements.
